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Ben Holmes: A Different Tech Model In Europe

Where is Europe’s Silicon Valley? This is the inevitable opening question the U.S.- tech media has for a European venture capitalist. The same question also haunts every technology conference in Europe with different panelists, speakers and participants attempting to cobble together coherent rebuttals to this loaded question. One New Year’s resolution that I am still clinging to is not to walk into the trap of answering this question head-on again.

Yes, Europe doesn’t yet have a tech company the scale of Google, Facebook, Amazon or Apple. Nor does it have a pool of capital as deep and free-flowing as Silicon Valley has. However the outlook for European technology has never been more positive. There are increasing signs that a different model is emerging in Europe that can produce tech companies that will compete and succeed on a global scale.

What underpins this optimism is the rapid reconfiguration of the European startup ecosystem around a handful of key tech clusters or hubs. When I started in venture capital in 1999, technology entrepreneurs in Europe were rare and spread diffusely over the continent. There were relatively few events or forums where ideas could be exchanged and tested. Recruiting young developers and marketers into a startup was challenging against the strong gravitational attraction of Europe’s then- booming financial capitals. Fast-forward 15 years and the well-documented emergence of thriving technology clusters in London, Berlin, Stockholm and Helsinki has transformed the landscape. Graduates are beating a path to work in startups and tech events are oversubscribed and ever more bullish in tone. Rival clusters are also forming in Paris, Copenhagen and Tel Aviv.

There are various factors and trends that have fostered the development and continue to drive the growth of these tech hubs in Europe. Mobility of labor has definitely played a part. The free movement of labor laws enacted by the EU, and extended to Eastern Europe over the last decade, have meant cities like London can attract ambitious founding teams from across Europe.

Government support has also definitely been helpful. Though the UK government did not spark the creation of London’s “Silicon Roundabout,” their active sponsorship of the tech city initiative has definitely legitimized and raised the international profile of what started as very local phenomenon. It is notable at tech events like Slush in Finland, the Prime Minister Jyrki Katainen was an engaged attendee. Similarly David Cameron, the UK Prime Minister has attended Founders Forum events in London and enthusiastically championed the role tech can play in driving the economy.

Most countries in Europe have made the wise decision to stop short of running large state-sponsored direct investment programs. These typically crowd out private sector capital. Instead governments have opted for tax incentives to stimulate investing in startups such as the UK’s Enterprise Investment Scheme (EIS) or co-investment funds like Finland’s TEKES program, which both complement private sector investment.

Beyond supportive government and a thriving event scene, another factor that is critical for the sustainable growth of tech hubs are marquee companies. These generate wealth for founding teams, employees and their venture capital backers. Much of this wealth gets recycled into seed and angel investor activity.

In many of the European tech hubs, notably London and Berlin, there is a vibrant angel investing scene often fuelled by the wealth generated from exits. Both London and Stockholm lay claim to Skype*, which was one of the first major exits for a European tech company when it was acquired by eBay in 2005. Paris had its first major success since Business Objects, when Criteo* listed on the Nasdaq last year. Criteo’s invention of the smart advertising banner and their global leadership in this ad format was further validation that European tech companies could become global leaders. Their Paris office is very much the epicenter of the city’s emerging tech scene.

In the Nordics, Stockholm seemed to be the winning tech cluster, where Spotify is the clear global leader in music streaming and Klarna, an innovative payments company, has reached major scale and attracted capital from Sequoia Capital of the US. However in the last couple of years, Helsinki has burst onto the scene as major global hub for mobile gaming. First the success of Rovio with its Angry Birds franchise and now Supercell*, the company behind Clash of Clans and Hay Day, that is 2013 was part-acquired by Softbank in a transaction which valued the Company at $3 billion. From the ashes of Nokia, Helsinki has emerged as a thriving tech ecosystem which is now home to more than 50 mobile gaming startups.

Of all the technology clusters in Europe, London is the most developed and has recently cemented its position with two major IPOs. First there was King*, the London-based company behind Candy Crush which listed for more than $6 billion on NYSE. Just Eat*, a global leader in online and mobile food ordering, soon followed when it was the first company to list on the newly formed High Growth Segment of London Stock Exchange, where it was valued at £1.5 billion.

While Berlin may not yet have had the billion dollar exits of other European startup hubs, it has some very promising emerging winners. Zalando is now one of Europe’s biggest ecommerce companies. It was founded by the Samwer brothers, legendary in Germany for a string of successful tech exits. Germany is also home to SoundCloud*, the world’s largest online archive of recorded sound and music. The company’s founders left Sweden to become one of the pivotal companies behind Berlin’s growing startup scene and succeeded in attracting multiple rounds of investment from leading European and US venture capital firms.

Beyond a growing roster of very successful tech companies another aspect of Europe’s more federated tech ecosystem has been that distinct clusters have often developed a unique vertical specialization. While Helsinki has great talent and multiple success stories in mobile gaming, London is leveraging its status as a world financial center to create an exciting crop of financial services startups.

London even has its own dedicated incubator, Level39, exclusively devoted to supporting entrepreneurs developing disruptive financial services companies. At the edge of Europe, Tel Aviv in Israel has also had some successful exits and many promising emerging companies focused around software security and mobile security, such as Lacoon* and Adallom*.

How long it takes for European’s startup clusters to produce winners to match Silicon Valley’s biggest companies is hard to predict. However in its emerging model of distinct regional tech hubs, each with their own unique vibrant startup atmosphere and areas of specialization, Europe’s startup culture is rapidly changing for the better. Most importantly entrepreneurs need no longer be lonely in Europe. In Europe’s tech clusters, they are sharing their journey and sharing experience with bigger and tighter networks of founders and investors.

With each successful exit, the ambitions of European founders are also step-wise elevating toward those of Silicon Valley founders.

*An Index Ventures portfolio company.

Mr.Holmes is a general partner at Index Ventures in London. He focuses primarily on Internet and games sectors.

About The Accelerators

For aspiring or actual entrepreneurs, The Accelerators is an online archive of discussion among startup mentors– entrepreneurs, angel investors and venture capitalists. Although the blog is no longer being updated, its content lives here and you can see an archive of its tweets through June 2015 @wsjstartup.